Apr 16

I’d always thought, and advised others, that to retire, one should have their mortgage paid in full. And that was always my own plan. But, anyone who knows finance knows that you can’t plan on an exact stock market return, you can’t plan on your own health being excellent, nor your marriage outlasting your mortgage. In our case, these things actually all are going pretty well, thank-you. What changed was our income which I posted about a few months back. While we were working, we saved, over 20% per year on average. We topped off the 401(k)s and IRAs, and put aside money for our daughter’s college tuition. In hindsight, we could have saved a bit less, and aggressively paid off the mortgage, and I know there are people who are in the Dave Ramsey “debt is evil” camp who will agree, but I have no regrets. I’m a numbers guy and as rates fell, I was a serial refinancer. We entered our retirement phase with a fresh 15 year 3.5% mortgage.

When we lost our jobs, the balance was $265K, and I did the math to see what it would have taken to have no loan on that day. Our average interest rate was 6.0% over the prior 15 years. An extra $935 per month for that time and we’d have no loan. Keep in mind, the market was interesting during that 15 year stretch from 1998-2012. A 3 year slo-mo crash with a cumulative 38% market loss. A 2008 loss of 37%. The compound growth during this stretch was 4.4%. But didn’t I just say my average loan rate was 6%? Yes. The difference was going into our retirement accounts. Not the matched portion, although that would certain tip the numbers in my favor. Just the regular pretax savings. And even with that disparity between my mortgage rate and the low market return, the 401(k) had $349K extra vs our $265K mortgage. What’s interesting to note here is that the money went into our retirement account at a marginal 28% tax bracket most years. But now, the withdrawals are at 15%. At a current rate of 3.5%, the mortgage payment is $1966, and if you do the math, it takes $2313 from the 401(k) to make this payment.

Two years have since passed, and the market in 2013 and 14 was very rewarding. A gain of over 50%. We ended 2014 with the mortgage at $233K and the calculated 401(k) extra funds at $453K. The interest deduction wasn’t part of my math, although it helps my numbers a bit. Instead of the whole payment being subject to the 15%, the first $8,000 is interest and, with some good planning, keeps us from hitting the 25% bracket.. No one should keep a mortgage “for the deduction” of course, paying a dollar to save 25 cents makes no sense. From where I sit, it simply means my 3.5% mortgage is actually 2.6%.

The fact that we hit our number while taking the mortgage payment into account, and not counting on social security which is still quite a few years away, is what lets me really sleep at night. Right now, I can’t say whether the mortgage will be paid off before we decide to move. Either way is fine by me. Paid off, our number drops, freeing up our savings for other endeavors.  A move would drop our cost of living, as we’re currently in one of the higher expense parts of the country.

The bottom line? 2 crashes over a 15 year span and the results are still in my favor. The key thing was that the difference was put into savings, not just absorbed into the spending portion of our budget. No regrets.

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Nov 12

Is it wise to have no debt at all when you are planning a mortgage in the not-too-distant future? That’s what I was pondering after a blogger I follow was considering wiping out her student loan.

stephloan

If you’ve not read Stephanie’s blog, Graduated Learning, you might give it a try. The tag line is “I got my degree, I got a job…now what?” Not just any degree, Stephanie is an MIT graduate. Now, to her shared thought bubble above. Here’s what we know, she has a 2.75% student loan, enough cash to pay it off, and an engagement ring on her finger. No high interest debt, else that would surely be the priority for payment. Let’s look at how paying off the student loan might impact the size house she and her new hubby can buy.

We’ll make some assumptions, to offer a general idea of why you should or shouldn’t kill that last bit of debt before buying your first house. We’ll keep the math simple and start with a $100K salary. Engineering grads are starting higher than $50K, but $100K makes it easy for you to scale up or down to your our salary. When applying for a mortgage, the old ratios used to be 28/36. This means that monthly housing debt can be up to 28% of monthly income and total debt, 36%. In this example, 28% is $2333 per month. Let’s set aside $500 of this for property tax, and look at an $1833/mo mortgage payment. The 30 year fixed rate is just under 4.25% right now, so my trusty TI35 calculator tells me the new couple can afford a $372,600 mortgage. With 20% down, this is a house purchase of $465,750, and the down payment is $93,150. For most people, it’s not the mortgage that’s the deal breaker, it’s the down payment. The money she might wish to use to pay off the student loan will be very precious when she and Mr Blogger are house hunting.

Paying off the debt won’t put them in a better position, either. You recall that I mentioned that total debt service can be 36%? That 8% gap from 28 to 36 is $667/mo. Enough to support payment on a 10 year student loan of nearly $70K. You see how this works? The payment toward the loan isn’t impacting their ability to get a mortgage, and paying it off wont enable them to get a higher mortgage. But the ability to put 20% is pretty important. Imagine finding the right house, all is perfect, location, size, price, etc. But having paid off that student loan, they are a bit short on the down payment, and need to wait 6 months to save up again. Better to pay the 2.75% loan’s minimum payments, and in a year or two, after they are settled in the house, see if the emergency fund is topped off. And the retirement accounts are funded at least to the match. After that, if they wish to get rid of that low interest debt, no problem.

Last – the area we live in, not far from Boston, isn’t near the US average. Home prices can easily exceed $500K without living in a McMansion. And living too far from one’s job can result in 3 hours of daily commuting time. But again, these numbers are just an example to illustrate the need for that down payment and how the 28/36% gap can work to your benefit.

 

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Oct 06

Given the recent events in Washington, it’s appropriate to start this week with Roger Wohlner’s Some Stock Market Perspective amid the Government Shutdown. Roger talks about the long term, and how short term bits of news or craziness in Washington get lost in the noise when we look at decades of data. Check out his article for the beautiful charts he’s posted, but stay to read his insightful commentary.

A Thank-You to J Money, my McDonald’s Budget article was featured at Budgets Are Sexy this week in J’s Rockstar Roundup: Billionaires, Weirdos & Drug Dealers. (Disclaimer – I am not, nor likely to ever be, a billionaire, nor am I a drug dealer. At times, I’ve been called weird. I plead, no contest.)

At Get Rich Slowly it was time to Ask the Readers: What’s the best way to prepay your mortgage? The reader asked about making bi-weekly payments on her mortgage. I have no objection to setting money aside to make extra payments if that’s what you’d like, but I advise never to pay extra to service the bi-weekly payment. Just send in the extra funds as they accumulate.

government-shutdown

Who Really Needs Your Social Security Number? This was the question that was answered at MoneyNing this week. It’s not a number you should give out to anyone that asks, there are really a few select times it’s actually required. Emily explains when to just say “no.”

Just when I thought I’d never reference Soylent Green again, Frugaling.org posted Soylent: The Future Frugal Food Source. It seems a company has appropriated the name Soylent and is manufacturing an inexpensive source of nutritious food under this name. To be fair, the Soylent website offers a discussion of food waste and cost. This product has the potential to reduce the issue of starvation in the world. If you visit the site, you’ll note the founders of the company are young, too young to have seen the movie in the theaters. It’s we who are 50 and over who will be a bit grossed out by the name of this product.

And from Time Management Ninja – Why Being Right Isn’t Always the Most Productive Answer. I offered my own comment, agreeing with Craig that time is important, and sometimes moving on is far more important than being right. The debate can be a productivity killer. I’ve seen it happen time after time.

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Sep 29

A busy week, with some great articles to discuss. At Bargaineering, Miranda gave some guidelines on How to choose between a traditional 401(k) and a Roth 401(k). It takes a bit of math and analysis to calculate the better option, and Miranda’s advice helps provide some insight to this process.

At Monevator, Why I’m not paying off my mortgage. The math is simple, his mortgage is currently 1.24% The Accumulator is comfortable his investments will beat this rate long term, so instead of paying off the mortgage, he’s staying fully invested. This issue has people on either side and a whole bunch in the middle. I’m in the group that will be paid off before retiring, but not in a rush to accelerate payments to end it sooner. How about you?

Len Penzo tells it like it is, he doesn’t mince his words. And it seems neither do guest posters at his blog. This week, Joe Saul-Sehy advises, Don’t Be a Moron: How One Man Paid $87,500 in ‘Moronic’ IRA Fees. You read my delightful and informative article A 401(k) is not an investment? This one could be a great follow up to it, alternately titled “An IRA is not an investment.” Against all the good advice Joe S had to offer, a client “cashed out” his IRA, and was left with a huge tax bill and penalty. The title was slightly misleading, to me a fee is something else, but the story brought a tear to my eye as I considered how many hours the story subject must have worked to earn this money, and it was gone with one stroke of a pen.

At I Heart Budgets, Jacob asked a question – What’s Your Percentage? He’s saving 6% of his income and would like to increase this number to help pull in his projected retirement date. A nice goal, Jacob.

Ninja at Punch Debt in The Face tells us, “I hate paying for things that we don’t use.” I don’t blame him. It’s bad enough to spend money on the necessities, but to see it go towards things you don’t use is just awful. No Netflix for me, either, Ninja.

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Aug 27

I’ve been away for a bit, but still reading my fellow finance bloggers, so here’s my latest roundup of the ones that really impressed me –

Let’s start with The best mortgage term: 10 years at Preretired.org. Preretired Nick makes a great case for what now appears to be an ultrashort term loan. You see, the 30 year loan wasn’t the mortgage of choice, not until after the Great Depression. But, let Nick share the details with you, it’s an insightful article.

At Mighty Bargain Hunter, John shared Soup to nuts: Preparing meals to save money, a discussion on how to reign in the cost of cooking. Given how food is such a large chunk of the typical budget, this is a great place to start.

readwell

Two class action suits came to my attention, one for Naked Juice, the other for Barbara’s Bakery. You don’t need any proof of purchase just yet, after all, who saves detailed store receipts, but you might in the future. We’ve used products from both companies, let’s see if they give us back a few dollars.

Barry Ritholtz shared his Favorite “Non-Boring” Business Books. I now have a number of new books to add to my reading list. Sometimes reading these books will help you avoid disastrous mistakes others have made. Better to learn from history than to repeat it.

Next, a Major life event update from Stephanie. She is a fellow Massachusetts-based blogger, and broke the news this week – She’s engaged.  I wish her well. Jane and I will soon celebrate our 19th anniversary, so despite all the divorce statistics, a marriage can last a long time. Good wishes to you, Stephanie, I’m looking forward to hearing about your big day.

We’ll wrap up the week with Len Penzo’s Why Pastry Chefs Are Financially Savvier Than The Common Man. I won’t even try to explain the connection, you’ll just have to read it for your self.

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